The average cost of private college tuition was a staggering $35,087 for the 2020-21 school year, according to U.S. News & World Report. That’s nearly the median annual full-time income of $35,977.
What’s more, those costs only include direct tuition and fees. They say nothing of textbooks, room and board, and the other living expenses college students incur, which can add many more thousands of dollars each year.
All of which begs the question: How do middle-class families pay all these college costs?
It’s a question with many answers and one that every family has to answer for themselves. That said, you can follow several strategies to help your kids cover college costs without bankrupting yourself in the process — and while requiring them to put some of their own skin in the game
College Savings Accounts 101
You have two primary options for tax-sheltered college savings accounts: 529 plans and Coverdell Education Savings Accounts (ESAs).
Both work similarly and have a lot in common with Roth IRAs, in that you pay federal income taxes on contributions, but the money grows tax-free. The IRS does not tax withdrawals when used for legitimate higher education expenses like tuition, fees, or textbooks.
But you don’t want to overinvest in these accounts, as you can incur penalties if you use the money for expenses other than education. When in doubt, invest the money in other tax-sheltered accounts instead, such as IRAs, Roth IRAs, health savings accounts, or employer-sponsored retirement accounts like 401(k)s or SIMPLE IRAs.
You name a beneficiary when you set up the account, but both 529 accounts and ESAs allow you to change that beneficiary. If your older daughter gets a full-ride scholarship, you can switch the account beneficiary to your younger son. If he too surprises you with a full scholarship, you can change the beneficiary to a grandchild, niece, nephew, or even yourself.
As a final thought, keep in mind that financial aid offices do not see the funds in either of these two account types when reviewing applications for student aid.
Education Savings Accounts
Coverdell ESAs were created on the federal level, and the rules are consistent nationwide. The tax benefits work similarly to a Roth IRA, but you use the accounts for college education expenses rather than retirement.
You can contribute up to $2,000 annually per student, although the ability to contribute phases out for higher earners. Single filers’ ability to contribute phases out between incomes of $95,000 and $110,000, while married filers’ ability phases out between $190,000 and $220,000.
Like Roth IRAs, you can create the account with an investment brokerage like TD Ameritrade. You also get to pick and choose any investment options you want to hold within the account.
Contributors can withdraw money tax-free for not only college expenses, but any primary or secondary education expenses. And ESAs allow a broader definition of “education expenses” than 529 plans, including not just tuition, fees, and books but also equipment like computers and services like Internet access.
One downside to ESAs is the age limit: withdrawals can only be used for beneficiaries under 30. If your 31-year-old decides to go back and finish their degree, you’ll incur taxes and a 10% penalty on withdrawals.
529 Plans
Unlike ESAs, 529 college savings plans operate on the state level and vary considerably by state.
Many states offer two types of plans: an investment account and a prepaid tuition plan.
The investment plan operates similarly to an ESA, although the state manages the fund, so they pick the investments, not you. Some states offer a few different investment allocation options. But like ESAs, the money grows in the fund, and you withdraw it tax-free for college expenses.
Some states allow a tax deduction on your state tax return, in addition to allowing the money to grow tax-free — up to an annual cap, at any rate.
Prepaid tuition plans involve prepaying the state in advance for your child’s education. If your child attends an in-state university, you don’t pay another cent for tuition, assuming they graduate in four years. If your child changes their mind at the last minute and insists on going to another state’s school, you typically pay any overage in costs.
Historically, 529 plans could only be used to pay for college expenses. But as of January 1, 2018, you can now withdraw up to $10,000 per year to put toward primary or secondary schools as well. These plans place more restrictions on withdrawals than do ESAs, however, requiring withdrawals to be used only for tuition and fees, room, board, or books.
The contribution limits for 529 plans are far higher, at $15,000 per year in 2021. The plans do not phase out at higher income levels and do not place any age restrictions on beneficiaries.
How Much to Save Based on Your Child’s Age
By now you know your child’s college education costs could be one-tenth of their best friend’s costs — or 10 times as much. You can structure any tuition help you want to provide your child however you like, ranging from none at all to fully funding it.
If you plan to help out, I recommend choosing a target amount you plan to offer in assistance. It keeps your savings goals predictable and transparent, and it helps you set expectations with your child.
I created a table below, based on different monthly contribution amounts and lengths of time. The earlier you start, the less you have to contribute, as compounding steps in and starts doing much of the heavy lifting for you.
I assumed an 8% average annual return — in line with the 7% to 10% historic stock index performance, depending on which index you analyze.
| Year | $100/Month | $200/Month | $300/Month | $400/Month | $500/Month | $600/Month |
| 1 | $1,252.93 | $2,505.86 | $3,758.80 | $5,011.73 | $6,264.66 | $7,517.60 |
| 2 | $2,609.15 | $5,218.29 | $7,827.44 | $10,436.59 | $13,045.74 | $15,654.88 |
| 3 | $4,077.16 | $8,154.31 | $12,231.47 | $16,308.63 | $20,385.79 | $24,462.94 |
| 4 | $5,666.18 | $11,332.36 | $16,998.54 | $22,664.71 | $28,330.89 | $33,997.07 |
| 5 | $7,386.19 | $14,772.37 | $22,158.56 | $29,544.75 | $36,930.93 | $44,317.12 |
| 6 | $9,247.98 | $18,495.96 | $27,743.94 | $36,991.91 | $46,239.89 | $55,487.87 |
| 7 | $11,263.24 | $22,526.48 | $33,789.73 | $45,052.97 | $56,316.21 | $67,579.45 |
| 8 | $13,444.63 | $26,889.26 | $40,333.88 | $53,778.51 | $67,223.14 | $80,667.77 |
| 9 | $15,805.83 | $31,611.66 | $47,417.49 | $63,223.32 | $79,029.15 | $94,834.98 |
| 10 | $18,361.67 | $36,723.34 | $55,085.01 | $73,446.69 | $91,808.36 | $110,170.03 |
| 11 | $21,128.20 | $42,256.39 | $63,384.59 | $84,512.78 | $105,640.98 | $126,769.18 |
| 12 | $24,122.77 | $48,245.54 | $72,368.31 | $96,491.09 | $120,613.86 | $144,736.63 |
| 13 | $27,364.20 | $54,728.39 | $82,092.59 | $109,456.78 | $136,820.98 | $164,185.18 |
| 14 | $30,872.82 | $61,745.64 | $92,618.46 | $123,491.27 | $154,364.09 | $185,236.91 |
| 15 | $34,670.66 | $69,341.33 | $104,011.99 | $138,682.66 | $173,353.32 | $208,023.99 |
| 16 | $38,781.57 | $77,563.15 | $116,344.72 | $155,126.30 | $193,907.87 | $232,689.45 |
| 17 | $43,231.36 | $86,462.71 | $129,694.07 | $172,925.42 | $216,156.78 | $259,388.14 |
| 18 | $48,047.94 | $96,095.89 | $144,143.83 | $192,191.77 | $240,239.71 | $288,287.66 |
Again, there’s no right or wrong amount to contribute, and your child’s actual costs will vary based on where they matriculate and the amount they earn in scholarships and grants.
Set a target and maintain transparency with your child from the very beginning of the process about what kind of help you can offer — and what conditions you’re attaching to that help.
Alternative Model: Front-Loading Your Contributions
The more you can contribute early, the more you can lean on compounding. If you find yourself in a financial position to contribute more money in your child’s first years of life, you can ease off the contributions later.
For this exercise, I ran the numbers for monthly contributions for only the first six years of the child’s life. After that, you don’t invest another dime, and simply let the funds compound for the next 12 years.
Here’s how the balances look, both at age 6 when you stop contributing when they reach college age and you start withdrawing:
- $100/Month: $9,247.98 at age 6; $23,925.18 at age 18
- $200/Month: $18,495.96 at age 6; $47,850.35 at age 18
- $300/Month: $27,743.94 at age 6; $71,775.53 at age 18
- $400/Month: $36,991.91 at age 6; $95,700.67 at age 18
- $500/Month: $46,239.89 at age 6; $119,625.85 at age 18
- $600/Month: $55,487.87 at age 6; $143,551.03 at age 18
- $700/Month: $64,735.85 at age 6; $167,476.20 at age 18
- $800/Month: $73,983.83 at age 6; $191,401.38 at age 18
- $900/Month: $83,231.81 at age 6; $215,326.55 at age 18
- $1,000/Month: $92,479.78 at age 6; $239,251.70 at age 18
If you follow this strategy, make sure you have a backup plan for the funds in case your child decides not to go to college.
The “2 in 10” Rule
As a quick rule of thumb, Fidelity offers another shorthand to tell whether or not you’re on track.
The “2 in 10” Rule states that for every $10,000 per year of college help you want to offer, you multiply your child’s age by $2,000. That’s how much you should have saved at each age.
Consider a few examples. If you plan to offer $10,000 in tuition help per year of college, and your daughter is 13, then you multiply 13 by $2,000 to reach $26,000. So, if you have $26,000 saved, you can consider yourself on track.
Alternatively, say you plan to offer $20,000 in tuition help per year of college. For your 13-year-old, you again multiply 13 by $2,000 to reach $26,000, then double that because you plan to offer $20,000 per year (double $10,000). You should have $52,000 saved by age 13, in this case.
The earlier you start planning how much you want to help your children with tuition, the better you can plan for those numbers and stay on track.
Final Word
As you start thinking about how to pay for college, keep in mind most families cobble together the money from many sources. You do not have to foot the bill with savings alone.
According to Sallie Mae’s 2019 study “How America Pays for College,” the average American college student covers their costs through this combination of sources:
- Grants and Scholarships: 31% of costs
- Parent Income and Savings: 30%
- Student Loans: 14%
- Student Income and Savings: 13%
- Loans Borrowed and Parents: 10%
- Help from Other Family Members: 2%
Involve your child in the conversation about college costs several years before they actually start applying to schools. Set expectations with them early, and have them participate in the process of sourcing funds, particularly in applying for scholarships and grants. If you decide to give them financial help with the cost of college, incentivize them to reduce costs wherever they can.
Finally, make it crystal clear that your tuition help comes with strings attached. If they don’t perform by going to class and earning strong grades, they stop getting your help. You didn’t scrimp and save for decades to fund a four-year party.
Again, set expectations for these conditions in advance, and structure your help in a way that incentivizes their best effort.
